Airports and the Newest Generation of General Aviation Aircraft, Volume 1: Forecast (2009)

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5Introduction The use of next-generation aircraft for personal, private, and corporate purposes is more in line with the traditional reasons for purchasing small GA aircraft compared with the new mar- ket potential for air taxi services. However, projections of such sales can still be very uncertain because the reasons for purchase are quite varied and will depend on individual or company cir- cumstances that are typically unobservable, on intended use, on equipment characteristics that will have differing importance to differing buyers, and so forth. These difficulties argue against a detailed bottoms-up “micro” approach. A better alternative is a macro-type analy- sis that relates aircraft sales to larger economic factors such as overall growth in the economy and interest rates. For the cur- rent analysis, such relationships are likely to track better at more aggregate levels. Consequently, the relevant market into which VLJs will fit into is defined to include shipments of GA piston, turboprop, and light jet aircraft (plus the initial ship- ments of VLJs themselves in 2007—the Eclipse 500 and Cessna Citation Mustang). The light jet models included in this defi- nition are the Cessna CJ1 and CJ2 series, plus the Hawker Beechcraft Premier 1A.2 Projections for the Overall Market Because the primary interest is in aircraft fleets that will be active at U.S. airports, the U.S. fleet is defined as total U.S. shipments minus exports plus imports.3 Shipment counts by U.S. manufacturers were obtained from the General Aviation Manufacturers Association (GAMA) Annual Shipment Re- ports, which also include reports of GA exports and imports. To assess how U.S. net shipments are tied to movements in the overall economy, data were assembled on annual shipments,4 on U.S. real gross domestic product (GDP), and on long-term interest rates (using the rate on 10-yr U.S. treasury notes) from 1999 through 2007. These data are shown in Table 4. There is typically a strong trend component in time series data that can falsely imply a relationship among components where none really exists. To account for this, all data series were converted to annual percentage changes and then a lin- ear regression of the percentage change in net shipments as a function of the percentage change in GDP and the 10-yr trea- sury rate was run. The regression line provided a reasonably good fit to the data with an adjusted R2 of 0.701. The actual versus predicted results are shown in Figure 1. To project future net shipments through 2017, the latest 10-yr forecast issued in September 2008 from the U.S. Con- gressional Budget Office (CBO) was used to get projections of real GDP growth and the interest rate on 10-yr treasury notes. The CBO forecast reflects some recognition of the steep economic downturn in the second half of 2008, projects very slow growth through the end of 2009 followed by a re- bound in 2010–11 but with interest rates also increasing, and then projects a gentle softening throughout the remainder of the forecast through 2017. Substituting these forecasts into the regression equation yields estimates of net U.S. aircraft shipments encompassing the piston, turboprop, and light jet categories (plus the first-year VLJ shipments from Eclipse and Cessna). These projections are shown in Figure 2. As will be seen, shipments through the first half of 2008 indicate an over- all decline in sales, but the regression model shows virtually no C H A P T E R 2 GA Forecast 2The remainder of the jet aircraft are all priced well beyond what any VLJ might sell for and really do not compete in the same market. 3Aircraft are considered to be manufactured in the United States when produced under an FAA production certificate. Export and import data are not identified for individual makes and models. In addition, the im- port statistics used are shown in the GAMA shipment reports obtained from the Aerospace Industries Association (AIA); these statistics in- clude single-engine aircraft plus small and medium multi-engine air- craft weighing up to 10,000 lbs. 4Because this portion of the analysis focuses only on GA use, the ship- ment totals were decremented by the share of air taxi (FAA Part 135) use reported for each aircraft group in the annual GAMA Databooks.

6Year Net US Shipments* Real GDP (Billions of 2000$) Rate on 10-Year Treasury Note 1999 1837 9,470 5.65 2000 1948 9,817 6.03 2001 1889 9,891 5.02 2002 1763 10,049 4.61 2003 1895 10,301 4.01 2004 2027 10,676 4.27 2005 2273 10,990 4.29 2006 2358 11,295 4.80 2007 2298 11,524 4.63 *Includes piston, turboprops, VLJs and light jets, adjusted for GA use only Sources: Real GDP - US Department of Commerce, Bureau of Economic Analysis, www.bea.gov/national/nipaweb/index.asp Treasury Rate - US Federal Reserve Board, www.federalreserve.gov/releases/h15 Net US Shipments - GAMA General Aviation Airplane Shipment Report, various years. Table 4. Historical data. -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 A nn ua l P er ce nt ag e Ch an ge Predicted Actual Figure 1. Actual versus predicted change in net U.S. ship- ments of small GA aircraft. 0 500 1000 1500 2000 2500 3000 2007 N et U S Sh ip m en ts 2017201620152014201320122011201020092008 Figure 2. Projected net U.S. shipments of small GA aircraft.

change from 2007 (largely due to low interest rates). Looking further ahead, the model projects a significant decline in ship- ments in 2009, substantial growth by 2011–12, and then mod- est increases through the end of the forecast period in 2017. Market Segmentation Analysis As VLJ production develops over the coming years, it is expected that shipments will be subject to these same eco- nomic fluctuations. For more understanding, it is useful to disaggregate the historical data for the existing market seg- ments. Unfortunately, the export and import data are not available for individual makes and models; instead, histori- cal changes in the market are assessed based on gross U.S. shipments (ignoring exports and imports), but breaking out the piston segment into two sub-groups—“high-end” and “other”—as shown in Figure 3.5 The estimates for 2008 as- sume that the production rates for each segment observed in the first half of the year relative to the first half of 2007 remains constant through the rest of 2008. In addition, the line total includes Eclipse and Cessna Mustang VLJ production starting in 2007. The figure shows that the overall growth in U.S. shipments over the past several years has been driven almost entirely by the high-end piston segment, which saw the introduction and growth of the Cirrus SR-22. In 2000, this segment accounted for about 10% of shipments and grew to about 34% by 2006. It is noteworthy that from 2000 to 2007, sales in the high-end segment quadrupled, but the overall relevant market grew by only about 18% (about the same percentage as overall real GDP). This suggests that even with the introduction of highly successful new aircraft models, total growth in the small GA market is still driven primarily by changes in the overall econ- omy. The other salient feature of Figure 3 is that both turbo- prop and light jet shipments have remained fairly constant over the past several years. However, there are indications that the economic slow- down in 2008 has affected high-end piston shipments fairly dramatically. Through the second quarter of 2008, high-end piston shipments dropped by 26% relative to the same period in 2007 and overall share dropped to about 27%. It is inter- esting to note that the turboprop and light jet sales continued to increase slowly in the first half of 2008, and the drop in the high-end piston sales was partially offset by the early appear- ance of VLJ shipments from Eclipse and Cessna. From a longer-term point of view, however, it is believed that VLJs will compete more closely with the turboprop and light jet segments. To see why, it is useful to understand how VLJs may fit into the competitive landscape. One way to ap- proach this is to compare aircraft characteristics that may be important in determining how potential customers choose among all available alternatives. To understand this compar- ison, data were assembled on average current selling prices 7 5The high-end piston segment is defined to include the following models: Cirrus SR22, Cessna/Columbia 350 and 400, Mooney M20 series, Beechcraft Baron G58, and Piper Malibu Mirage. Within this group, it is the Cirrus and Cessna/Columbia aircraft that account for virtually all of the growth shown in Figure 3. High-End Piston Turboprop Light Jet Other Piston Total incl VLJs starting in 2007 0 500 1000 1500 2000 2500 3000 2000 2001 2002 2003 2004 2005 2006 2007 2008est G ro ss U S Sh ip m en ts Source: GRA analysis of GAMA General Aviation Airplane Shipment Reports, various years. Figure 3. Breakout of gross U.S. shipments of small GA aircraft.

8Type Make/Model Price ($000) Cabin Volume incl External Baggage (cu. ft.) Speed (mph) Range (NM) Cirrus SR22 G2 460 169 180 930 Cessna 400 620 169 187 1143 Beechcraft Baron G58 1,078 196 197 888 King Air 90 2,952 227 260 840 King Air 200 5,089 303 283 920 King Air 350 6,115 351 310 1440 Piper Meridian 1,897 120 262 550 Cessna 208B Caravan 1,844 340 182 780 Cessna CJ1+ 4,528 243 381 857 Cessna CJ2+ 6,068 311 413 1074 Beechcraft Premier I/IA 6,205 370 426 850 Note: Average prices for Cirrus SR22 and Cessna 400 prices obtained from www.controller.com; range for Baron G58 obtained from www.cessna.com Piston Turboprop Light Jet Table 5. Comparative price and performance characteristics of existing models. Beechcraft Premier IA (J) Cessna CJ2+ (J) Cessna CJ1+ (J) 208B Grand Caravan (T) Piper Malibu Meridian (T) King Air 350 (T) King Air 200 (T) King Air 90 (T) Baron G58 (P) Cessna 400 (P) Cirrus SR22 (P)0 1000 2000 3000 4000 5000 6000 7000 8000 0 1000 2000 3000 4000 5000 6000 7000 8000 Expected Price ($000) A ct ua l P ric e ($0 00 ) Figure 4. Expected versus actual price of small GA aircraft. and certain key performance characteristics for a representa- tive sample of existing high-end piston, turboprop, and light jet models, shown in Table 5. To ensure consistency in the measurements, all of the data (with a few noted exceptions) were obtained from the same source (Conklin and de Decker Aircraft Cost Evaluator). A linear regression of price against the performance attri- butes of speed, range, and cabin volume (including external storage space) was run. The actual versus predicted price results shown in Figure 4 are quite interesting. The 45° line on the graph indicates an actual price equal to the expected price from the regression. Points below the line reflect aircraft that are priced below their expected price from the regression; points above the line show aircraft priced above their expected price. From a competitive analysis standpoint, it appears that the high-end piston aircraft (which are at the low end of the price structure) are priced below what one might expect based on their performance characteristics. At the same time, all but one of the turboprops in the sample are priced above expectations. One should not read too much into these interpretations because there may be other important attributes that would help explain the relatively higher-than-expected price of turbo- props (e.g., higher payload, better short-field capability, easier to fly than jets, etc.). Nevertheless, such an analysis can highlight potential market opportunities by identifying gaps

in the product space. In the case of VLJs, this may be seen by observing their performance characteristics and plotting their price points on the same graph, as shown in Figure 5. This exercise suggests that VLJs may indeed be able to gar- ner significant sales for two reasons: they are priced well below the expected price line given their performance char- acteristics and they occupy a relatively empty area in the product space, although closer to turboprops and light jets than to pistons.6 In terms of a shipment forecast, Figure 5 suggests that, at a minimum, VLJs should be able to produce as many ship- ments as the turboprop segment since their actual prices overlap with each other but the VLJs (on average) offer bet- ter performance characteristics. Recalling Figure 3, it is believed that the fairly constant 200–300 annual shipments produced by the turboprop segment should be easily reachable. On the other hand, just based on the price differential alone, it is not likely that the demand for VLJs for personal, private, and corporate use will come anywhere close to the 700–900 units achieved by the high-end piston segment. An important question is the extent to which sales of VLJs will cut into sales in the high-end piston segment and/or the turboprop and light jet segments. It is possible that the new VLJ segment may expand the size of the overall GA market. As discussed earlier, the evidence from 2000 to 2007 shows that the GA market was driven primarily by changes in aggregate economic activity rather than by the composition of existing models or the introduction of new models, so it is believed that any expansion of the overall GA market due strictly to the introduction of VLJs will be limited. By similar reasoning, neither the low end segment of the piston market nor the mid- to large-sized corporate jet market will likely be affected much by the introduction of VLJs since both markets really serve dif- ferent clientele. Outlook for VLJ Manufacturers Actual VLJ shipments observed over the next several years will depend heavily on the actual progress made in develop- ment, certification, and production capabilities of the various VLJ programs that currently exist. This section has been up- dated to account for important recent developments in these programs; the following fleet forecasts presented below, which were completed in the Fall of 2008, do not fully reflect these events. Eclipse 500 Eclipse Aviation originated the VLJ segment more than 10 years ago. The Eclipse 500 was certified in late 2006 and re- ceived its FAA production certificate in the spring of 2007. An updated avionics package was certified at the end of 2007. 9 Cirrus SR22 (P) Cessna 400 (P) Baron G58 (P) King Air 90 (T) King Air 200 (T) King Air 350 (T) Piper Malibu Meridian (T) 208B Grand Caravan (T) Cessna CJ1+ (J) Cessna CJ2+ (J) Beechcraft Premier IA (J) Embraer Phenom 100 (VLJ) Citation Mustang (VLJ) Eclipse 500 (VLJ) 0 1000 2000 3000 4000 5000 6000 7000 8000 0 1000 2000 3000 4000 5000 6000 7000 8000 Expected Price ($000) A ct ua l P ric e ($0 00 ) Figure 5. VLJs added to the product space. 6Single-engine VLJ models have not been included in this analysis be- cause their price and performance specifications are still too uncertain. The Diamond D-Jet, whose development is furthest along, appears to be most similar to the smallest of the twin-engine VLJs—the Eclipse— albeit with a significantly slower cruise speed and an uncertain price. Diamond has announced that it will be increasing its price for the jet because of the recent change in engines, but it has not announced the exact increase.

Eclipse announced a price increase from $1.6 million to $2.15 million in mid-2008. A total of 260 units were delivered through the end of 2008. Although press reports indicated that the company had an order backlog of 2,600 units in June 2008, approximately 1,400 of those were from the air taxi startup DayJet, which ceased operations in September 2008 after purchasing 28 Eclipse aircraft. DayJet announced that it is unlikely that the company will operate in the future. This left approximately 1,200 orders on the Eclipse books. At various times, press reports had indicated Eclipse’s pro- duction goal to be anywhere between 2 and 4 units per day, with a break-even point of 500 units per year (although this was before the 2008 price increase). But in August 2008, Eclipse an- nounced it was laying off 38% of its workforce. By October 2008, at least two industry analysts projected that Eclipse would cease U.S. production of the Eclipse 500 entirely in 2009.7 Pro- duction actually stopped in October 2008, and the company filed for Chapter 11 bankruptcy protection in November. By March 2009, company management and a number of creditors were seeking a Chapter 7 liquidation. Cessna Citation Mustang The Cessna Citation Mustang twin-engine VLJ was certi- fied in late 2006. The current base price of the aircraft is ap- proximately $2.8 million, and its primary target market does not include air taxi services. The company delivered a total of 45 Mustangs in 2007 and 101 aircraft in 2008. The company announced in October 2008 that it had achieved its planned full-rate annual production level and expected to produce 150 units per year starting in 2009. Embraer Phenom 100 The Embraer Phenom 100 is larger than other VLJs; it is also somewhat faster in terms of cruising speed and has a fairly sophisticated wing design. It is clearly aimed at the upper end of the VLJ market, with a unit price of about $3.2 million. FAA certification was achieved in December 2008 and two aircraft were delivered by the end of the year. Embraer has consis- tently announced order statistics for the aircraft only in combi- nation with the larger Phenom 300. In June 2008, the company claimed close to 800 firm orders for the two jets. The company announced that combined production for the two Phenom aircraft could ramp up to the 120–150 range in 2009. As with Cessna, Embraer believes there is a viable market for their aircraft independent of the success or failure of the air taxi market. Separately, press reports indicate that the company has revised its latest 10-yr market forecast for worldwide busi- ness jet sales, indicating faster growth in emerging markets and slower growth in North America. Based partly on Embraer’s historical pattern of sales and press reports of interest from other areas, it is expected that perhaps half of the Phenom pro- duction will be destined for the U.S. market. This compares with an aggregate historical average of about 25% non-U.S. sales in the GA market overall. The Fractional Ownership Market In addition to traditional GA sales for private, business, and corporate use, there are some indications that VLJs may be a viable option in the fractional ownership market. But there is little evidence that any of the major participants— NetJets, Flexjet (Bombardier), Sentient (fleet shares), or Flight Options (used aircraft)—has indicated direct interest in purchasing VLJs for their fleets.8 On the other hand, some smaller companies do have plans to include VLJs as an option in their fractional ownership programs. In addition, there are a number of other fractional providers of high-end piston and/or turboprop aircraft that compete near the same mar- ket space as VLJs. Based on these and other reports of small GA fractional ownership plans, the GA fleet forecast below accounts for a small but increasing number of VLJ sales for fractional use above and beyond the forecasts for specific manufacturers. Baseline GA Fleet Forecast Based on the competitive analysis and the projected over- all size of the net U.S. market as shown in Figure 2, the base- line forecast for net U.S. VLJ shipments for GA use are based on the following assumptions: • Overall market size will rise according to the estimates shown earlier in Figure 2. • By 2011, the approximately 120 annual Eclipse deliveries originally envisioned for the U.S. market will be replaced by other manufacturers with ongoing VLJ development programs such as Honda and Piper. • Shipments of the Cessna Mustang for GA use will reach the company’s stated goal of 150 annually in 2009, with 40% eventually going to foreign customers.9 10 7Teal Group Corporation, “World Military & Civil Aviation Briefing,” October 2008; Forecast International, “Forecast International Projects End of Eclipse 500 Production” press release, October 28, 2008. 8CitationShares, which is a joint venture of Cessna and TAG Aviation, focuses on fractional ownership of smaller aircraft including the Cessna CJ1, which is considered part of the “light jet” category in this analysis. 9According to Cessna, 60% of current Mustang orders are designated for non-U.S. customers (http://www.very-light-jet.com/vlj-news/vlj- manufacturer-news/cessna-citation-mustang-fleet-reaches-100.html).

• Shipments of the Embraer Phenom 100 for GA use will reach an annual rate of 90 by 2011, with 50% going to for- eign customers. • There will be some additional VLJ shipments from other manufacturers beginning in 2010, which will be further supplemented by a small number of shipments explicitly for fractional use. The baseline forecast for the United States based on these factors is shown in Table 6. Again, it is important to remember that these projections are for the U.S. market only and reflect the likelihood that a significant share of VLJ shipments will be overseas in the coming years. The projections suggest that VLJs will repre- sent around 14% of the total small GA market over the coming decade. As noted earlier, no specific account has been taken of the potential for sales of single-engine VLJs, which may somewhat offset the uncertainty with other projections. Operational Impacts on Airports How will the GA fleet forecast affect operations activity at GA airports? As noted earlier, it is believed that most non-air taxi VLJ sales will be substitutes for purchases of high-end piston, turboprop, and/or light jets; their effect on the size of the over- all market will be quite limited. In addition, the activity counts at many small airports typically do not grow even in proportion to overall fleet growth (presumably because the new additions to the fleet are most often used at larger airports). Consequently, it is believed that the overall level of future activity at most small GA airports will not be significantly af- fected by specific fleet projections of VLJ aircraft that are sold for traditional GA use. However, the composition of activity may change as VLJ operations come to displace piston or turbo- prop activity. Current FAA projections of operations such as those contained in the Terminal Area Forecasts (TAFs) are still probably the best indicators of future overall activity (but this is before accounting for potential growth from the air taxi market, which is discussed in the next chapter). 11 Year Major Manufacturers (Eclipse - Cessna - Embraer) Others Annual Total Cumulative Total 14314301432007 39925602562008 64925002502009 962313502632010 1,292330752552011 1,6473551002552012 2,0273801252552013 2,4073801252552014 2,7873801252552015 3,1673801252552016 3,5473801252552017 Note: Projections exclude shipments to non-US customers. Table 6. Annual VLJ sales forecast for U.S. market: GA only, excluding air taxi.